Christopher Niesche: Will Aussie mortgage holiday extension delay the inevitable?

Mortgage holidays have helped homeowners hold onto their homes, but they can't go on indefinitely. Photo / Getty Images

COMMENT:

The coronavirus has given Australia's struggling mortgage holders – and the economy – a reprieve.

The Big Four banks last week announced they would be extending the "mortgage holidays" for homeowners beyond the initial six months announced in March, giving hard-pressed borrowers another four months relief from paying their mortgage.

But the big question is whether the extra time will be enough for these borrowers to get themselves in a position where they can start repaying – or whether it will just be delaying inevitable loan defaults.

Banking data reveals the magnitude of the economic hit from the Covid-19 crisis.
Close to 900,000 home borrowers and businesses have deferred AU$266 billion worth of loans. That's about 10 per cent of total loans and almost one in every five small business loans placed on a repayment holiday.

The borrowers were originally given six months relief with the expectation they would restart repayments in September.

September is also when the Australian government's key economic support measures of wage subsidies and higher unemployment benefits are due to run out, so the four-month extension is good news for the economy. It means Australia is less likely to fall off a cliff because all financial assistance is coming off at the same time.

It will also shelter the housing market. Had the banks started foreclosing on tens or hundreds of thousands of mortgages, they would have pumped a huge amount of housing stock into an already depressed property market, particularly in Sydney and Melbourne.

The banks will be contacting customers to see who has the capacity to resume repayments and who needs longer, but they have also said they won't be extending relief to hopeless cases.

This will be a key litmus test on the health of the economy, with another one coming early next year when the extension runs out.

But it will also be crucial for the banks themselves. So far the big four have put aside a total of AU$5 billion in provisions for bad loans, which is only about 2 per cent of the value of mortgage holiday loans.

The coming months will reveal if the banks take a bigger bad debt hit, which in turn will affect the millions of retirees and pension fund savers who have a large portion of their wealth in bank shares and rely on the dividend for their income.

In an analysis of the Australian banking sector, KPMG argues the banks' long run of profit growth was already coming to an end and this will be exacerbated by the Covid-19 crisis.

Along with the hit from lower loan losses, an extended period of low interest rates as the Reserve Bank of Australia attempts to stimulate the economy will reduce the profit they make from loans.

Slower home sales and lower house prices will also reduce the rate at which their loan books grow, KPMG says.

AFTERPAY

As the banks struggle, there is one lender which is booming.

Shares in buy-now, pay-later company Afterpay surged 22 per cent to AU$67.50 on the Friday before last. But the run was far from over. Last week the shares continue rising to close above AU$72 on Friday.

The higher the stock gets the more momentum it gathers. This is in part because, with a market capitalisation of over AU$20 billion, it's now one of the 20 largest shares in the Australia market.

The company is now too large for fund managers to ignore, who were until recently sceptical of the company's success. Now they are buying, pushing the price up still more.
And mum and dad investors, always late to a trend, are also piling in. Over the past fortnight, budget retail broker CommSec has accounted for 10 per cent of total trade in Afterpay shares, higher than its normal levels for a company of this size.

Shares in buy-now, pay-later company Afterpay have surged. Photo / File

The surge comes after the company revealed record sales in the fourth quarter of the financial year, with underlying sales jumping 127 per cent to AU$3.8 billion. Afterpay's full-year sales have more doubled on the prior financial year, to AU$11.1 billion.

But there is also the fact that Afterpay is yet to turn a profit. Companies in this position are often valued by the ratio of their total debt and equity value to total returns over the previous 12 months.

By this measure, Afterpay is hugely expensive, with a ratio of about 60. Next is another buy-now, pay later company Zip with a ratio of around 30. Workplace messaging app Slack is trading around 24 and Netflix and Tesla each on about 10.
Not everyone is buying.

At the same time as the company said it would sell AU$1 billion worth of new shares to raise funds to speed up its global expansion, founders Anthony Eisner and Nick Molnar sold AU$250 million of their own shares.

Founders of tech companies often sell down their shares bit by bit as these two are and they still hold significant stakes in the company. Even so, when insiders with a deeper knowledge of the company than anyone else start selling, investors should take a second look.